Thursday, May 31, 2012

The
Pew Research Centre recently released a report entitled "European Unity on the Rocks: Greeks and
Germans at Polar Opposites". In this report, Pew looks at the divided
nature of Europe, how European member nations regard the Union, whether the
euro is a good thing and how each nation regards the European Central Bank
(ECB). Here is a summary of their findings from Pew's survey of 8 Member
States including Britain, the Czech Republic, France, Germany, Greece, Italy,
Poland and Spain.

As
one would expect, Europe's debt crisis has uncovered a nest of festering
resentments across Europe. Nations differ greatly on their opinions about
bailing out their poorer "cousins" and are discontented with
Brussels' ability to oversee their spending and budgeting processes. The
EU, an experiment in unifying sovereign states under the umbrella of a
megastate "overlord", looked to be successful at first. After
its adoption of the euro as its signature currency in 2002, it appeared that
the Union could well supplant the United States as the world's economic engine
and many so-called experts suggested that the euro could replace the United States
dollar as the world's reserve currency. Unfortunately, at this point in
time, the European debt crisis appears to have put a sudden halt to those
dreams of grandeur.

How
do Europeans feel about the state of their State? Here is a graph that
shows what percentage of respondents in each state feel that economic
integration under the EU has NOT strengthened their economy:

For
your information, a median of 66 percent of respondents from all countries
surveyed feel that their economies have not been strengthened by the
integration of Europe. Even Germans, who have done quite well
economically since the union, are less than resounding in their support for the
economic benefits of the EU with 41 percent suggesting that the union has done
little to benefit their economy. Not surprisingly, the two worst debtor
nations in the EU, Greece and Italy, overwhelmingly feel that their economies
have basically not benefitted at all from the union.

How
do Europeans feel about the euro as their currency? Here is a graph
showing just that, noting that only the countries that have the euro as their
currency have been surveyed:

That's
hardly what one would call a ringing endorsement of a currency, is it? So
much for the euro being the world's reserve currency. Again, even Germany
which has benefitted under the new economic reality can only muster 44 percent
support for its currency. Talk about not cheering for the "home team"!

Most of the respondents from Britain seemed quite complacent in their pride for sterling with 73 percent stating that they are quite happy that they didn't adopt the euro as a replacement for currency with the Queen's visage.

Lastly,
let's take a look at each nation's support for the European Central Bank, the
organization that has backstopped much of the debt crisis as it has unwound:

Across
the nations sampled, a median of only 39 percent of respondents gave the ECB a passing
grade with only one nation, Poland, finding more ECB supporters than
detractors. Not surprisingly, only 15 percent of Greeks found anything to
like about the ECB. Just over one-third of Italians supported the ECB; my
suspicion is that this could change very quickly if Italy is forced to its
knees by its nearly €2 trillion debt load.

In
another posting, I'll dig a little deeper into this interesting report but in
closing, I'll leave you with this screen capture from the report showing
exactly why it's pretty hard to get enthusiastic about either Europe or the
euro as an investment:

Greece certainly comes off poorly all around, doesn't it? Unfortunately
for the holder of the world's third largest nominal debt, they aren't regarded
all that well by their neighbours either! Europe - the world's largest Peyton Place.

Wednesday, May 30, 2012

A recent article on the Federal Reserve Bank of
Atlanta's website by Dave Altig, the Atlanta Fed's Executive Vice President
and Research Director, discusses the issue of the declining labor force
participation rate and provides us with an explanation for the decline as I
will outline in this posting.

The
labor force participation rate peaked at 67.1 percent between the years of 1997
and 2000 and has fallen rather steadily since then to a 17 year low of 64.7
percent. The fall has been most dramatic since the Great Recession; the
rate has dropped from 66 percent in 2008 to 63.6 percent in April 2012 as shown
on this chart:

Here is a less looked at labor force
participation graph showing the participation rate for men:

Male
labor force participation peaked at 87.4 percent in October 1949 and has fallen
steadily to 70 percent in April 2012, a drop of 19.9 percent.

Back
in the late 1940s when men's participation rate was peaking, only 33 percent of
women were in the workforce. Women's participation rate peaked at 60.3
percent in April 2000 and has slowly fallen to 57.6 percent in April 2012, a
drop of only 4.5 percent.

Here
are two more graphs. The first graph shows the labor force participation
rate for those 25 years and older with less than a high school diploma:

This
data in this graph shows that the labor force participation rate for these
Americans is currently 45.2 percent, down only 6.2 percent from its 20 year
peak in October 2008. I found that rather surprising considering that
Americans without a high school diploma have generally been considered among
the least likely to have regained employment since the end of the Great
Recession. That said, it is interesting to see that their participation
rate is 18.4 percentage points (or 28.9 percent) below that of the general
population.

This
final graph shows the labor force participation
rate for those 25 years and older with a Bachelor's degree or higher:

The
participation rate for these Americans peaked at 81.9 percent in July 1992 and
June 1993 and has fallen rather steadily to its April 2012 level of 76.2
percent, just off its 20 year low of 75.6 percent achieved in January 2012. Surprisingly,
since the end of the Great Recession in June 2009, the participation rate for
more educated Americans has dropped by 1.8 percentage points. While this
looks rather unsettling, recall that the labor force participation rate for
those Americans without a high school diploma in April 2012 was 31 percentage
points lower.

Back
to the Federal Reserve's analysis. Many mainstream and non-mainstream
journalists have attempted to resolve the issues behind the drop in the labor
force participation rate. The author notes that the decline in the
headline unemployment rate from March (8.2 percent) to April (8.1 percent) was
driven by yet another decline in the labor force participation rate. Why
is the participation rate falling and how much impact is this having on the
unemployment rate?

Staff
at the Federal Reserve have calculated that if the labor force participation
rate had remained constant from March to April of 2012 instead of falling, that
the unemployment rate would actually have risen to 8.4 percent rather than
falling to 8.1 percent.

Why
is the labor force participation rate falling? Many people feel that the
current job market is so poor that unemployed Americans are simply giving up
and falling off the Bureau of Labor Statistics' radar. Mr. Altig notes
that at least some of the decline in the participation rate is due to
population aging as older workers retire and remove themselves from the workforce.
Here is a chart from the article showing the impact of demographic
changes on the labor force participation rate:

Since
the beginning of the Great Recession, the labor force participation rate has
dropped by 2.4 percentage points. The Atlanta Fed estimates that 40
percent of the changes in the participation rate can be accounted for by
changes in the age and composition of the population. Since the beginning
of the Great Recession, 0.9 percentage points of the decline in the
participation rate can be explained away by the aging of baby boomers since the
labor force will grow more slowly than the total population aged 16 and older. If we look back at the FRED graph showing the participation rates by educational levels and gender, it becomes apparent that, if indeed Mr. Altig is correct, it is American males with a college degree that are responsible for the lion's share of retirements. As well, since
the participation rate fell by 2.4 percentage points, this leaves 1.5
percentage points unaccounted for. It is this 1.5 percentage point drop
that may well be due to cyclic unemployment (i.e. higher levels of unemployment
during a recession) that is becoming permanent structural unemployment (i.e.
jobs that are never regained even during an economic boom).

The
Federal Open Market Committee has projected that the unemployment rate would be
7.5 percent at the end of 2013. Mr. Altig proposes the following:

1.)
If the participation rate stays at 63.6 percent, the economy needs to create
144,036 jobs per month to reach an unemployment rate of 7.5 percent by the end
of 2013.

2.)
If the participation rate rises by the 1.5 percent that is unaccounted for by
demographic changes, the economy needs to create a whopping 304,260 jobs per
month to reach an unemployment rate of 7.5 percent by the end of 2013.

While it certainly would be wonderful if the unemployment
rate really did drop to 7.5 percent, a level that is still high by most
historical post-recessional standards, I suspect that the FOMC is dreaming in
technicolor. By the end of 2013, the world could well be in the grips of
another recession; at the very least, it is quite possible that within 18
months, the European debt influenza will find itself well established in the
world's economy, negatively impacting employment levels around the world.

Monday, May 28, 2012

Michael
D. Tanner of the CATO Institute recently published an article entitled "Europe's Failed Austerity" discussing the recent
election results in Europe as they relate to the public's backlash against
austerity programs. He notes that many American advocates of "bigger
is better government" use the apparent failure of European austerity
measures as an example of why Washington must make a sharp U-turn, reversing
its very modest attempts at fiscal balance. This seems to be of
particular importance to these advocates because they draw the conclusion that
Europe's very modest recent economic growth is directly related to cuts in
government spending. This recent GDP data release from Eurostat would appear to bear
up that argument:

Outside
of the former Iron Curtain countries of Slovakia, Estonia, Latvia and Lithuania
plus Finland, the United States' Q1 2012 GDP modest growth rate of 2.1 percent
looks stellar when compared to most of the rest of Europe where the average
economic growth rate is a barely perceptible (and easily correctable in a
downward direction) 0.1 percent for all 27 nations. Apparently, these big
government advocates would suggest that it is Europe's cut and slash ways that
have triggered a near-continentwide recession; this logic would suggest that
America should continue along its "stimulate by spending more than it
brings in" philosophy to keep the Union out of recession.

On
average, Europe's government spending contributes more than half of GDP. Government
spending appears to still be at roughly the same level despite so-called
austerity. Rather than cutting spending, nations have elected to raise
taxes, a measure that according to some economists is likely to have the exact
opposite impact on debt than anticipated. Here is a breakdown of the
austerity measures for both France and the United Kingdom:

1.) France has raised taxes by imposing a 3
percent surtax on incomes above €500,000 accompanied by a one perentage point
increase in the top marginal tax rate, raising it from 40 to 41 percent. France
also increased corporate taxes by 5 percent on businesses with more than €250
million in revenue and closed some corporate tax loopholes. This was
topped off with an increase in VAT from 19.6 percent to 21.2 percent.
All of this was implemented to keep the budget deficit for 2012 to 4.5 percent of GDP which is
still above the 3 percent European Union target. By the end of February 2012, the budget deficit had narrowed by
13.5 percent on a year-over-year basis, however, year-over-year spending was up
from €57 billion to €63.56 billion. Fortunately, revenues were up 13.5
percent to €43.2 billion. Despite France's best-laid plans, the budget
deficit hit 5.2 percent of GDP.

2.)
The coalition government in the United Kingdom has hiked personal income taxes for
those earning more than £150,000 to 50 percent. According to Mr. Tanner,
that move actually managed to decrease income tax revenues by £509 million. Oops!
While the U.K. government did trim payrolls and programs, British
government spending consumes more than 49 percent of GDP and has risen by £59.2
billion from 2009 to 2011. Again, oops!

This
seems to be the pattern throughout the Eurozone. Raise taxes on the
wealthy and promise that you'll cut spending at some distant and poorly defined
point in the future. In addition, governments in the Eurozone have
decided that raising the level of the Value Added Tax "licence to print
money" is the best option to achieve a semblance of fiscal responsibility.
As shown on this chart, here's how many Member States and
other jurisdictions are adopting this practice:

Never
let it be said that there's an original thinker among our leadership.

How
lucrative is the VAT machine? Looking at the case of Germany,
government's receipts from VAT totalled 36.6 percent of all
revenue compared to only 21.4 percent from income taxes on wages. To
simplify things, the more Germans spend, the more the government makes. In
my opinion, this certainly is not a sustainable situation particularly if a
continent-wide or global recession takes hold.

While
the topic of a Value Added Tax (VAT) has been on the back burner since it
reappeared in early April 2010 after a comment by Paul Volcker, the imposition of a consumption
tax is not likely off the table over the long-term, particularly since the U.S.
is the only OECD nation without a national sales tax. With four deficits
in a row in excess of $1 trillion, Washington desperately needs a "money
machine" since apparently, it has not seriously crossed the minds of those
in Congress to cut spending. With a debt of $15.7 trillion, Washington will be looking for any source of revenue that it
can get its hands on. It's going to be a case of "monkey see, monkey
do" for cash-starved Washington.

To
put this tax into perspective, here is a chart showing current VAT rates across
Europe:

Washington
will be hard-pressed not to engage the services of this particular cash cow and
what better time to do it than when a President is in his second term with no
need to try for re-election. From personal experience, living in a jurisdiction that is about to implement a similar tax, governments will do whatever they can to assure voters that these regressive forms of tax are anything but regressive and that you will actually be financially better off under the new regime.

I
summary, looking back at Europe, we see governments grabbing for cash using
creative tax measures at the same time as they are making very modest attempts
at spending restraint. Could these very unpopular moves be why voters in
France and Greece couldn't wait to turf their governments in recent elections? Perhaps
the electorate in other European nations will follow suit as they tire of
watching their governments grossly mismanage their fiscal responsibilities.

Moving to the western shores of the Atlantic Ocean, perhaps
Americans will adopt the same modus operandi in November 2012. Maybe
we're all just a wee bit tired of the same old nonsense from those that we
elect to "lead" us.

Wednesday, May 23, 2012

I
recently took a wander through the website for the Bank for International
Settlements or BIS and found one very interesting chart that I'd like to share.

First,
I'd like to give you a bit of background information on BIS and then I'd like
to give you a quick explanation about derivatives so that we can put the data
that you will see in the chart into perspective.

"The mission of the Bank for International Settlements
(BIS) is to serve central banks in their pursuit of monetary and financial
stability, to foster international cooperation in those areas and to act as a
bank for central banks.

The BIS pursues its mission by promoting discussion and
facilitating collaboration among central banks, supporting dialogue with other
authorities that are responsible for promoting financial stability, acting as a
prime counter-party for central banks in their financial transactions and
serving as an agent or trustee in connection with international financial
operations

As its customers are central banks and international organisations,
the BIS does not accept deposits from, or provide financial services to,
private individuals or corporate entities. The BIS strongly advises caution
against fraudulent schemes."

Basically,
BIS is the banker of all bankers. It is the penultimate central bank,
coordinating the efforts of its 58 member banks. BIS has two goals:
first, to regulate capital adequacy for banks and second, to make bank's
reserve requirements transparent to ensure that the risk of bank runs is
minimized. Editorially speaking, I'd say that BIS must have been sitting
on its hands during the Great Recession and during the recent implosion of many
of the banks in the Eurozone.

On
to part two. What is a derivative? Here
is the definition from Investopedia:

"A
derivative is a security whose price is
dependent upon or derived from one or more underlying assets. The
derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in
the underlying asset. The most common underlying assets include stocks,
bonds, commodities, currencies, interest rates and market indexes.
Most derivatives are characterized by high leverage."

For
those of you that have some knowledge of how stock exchanges work, you are
aware that you do not physically have to hold a company share in your account
to "own" that share, bond or commodity. You can "own"
it by holding a futures contract, an option to buy or sell, a swap or a forward
contract. As such, these instruments can be used to deflect risk on such
things as future declines in price, future changes in exchange rate or even
future changes in weather that could impact the price of a commodity. Basically,
you name it, and the minds controlling Wall Street have found a way to monetize
it through the creation of a derivative.

Basically,
derivatives are just "something that is based on another source",
that is, it is something created from something else. In our increasingly
"paper economy", it is creating something made of "paper"
from something that originally had value. If you want to know just how
dangerous these paper fabrications are to the economy, you need to think back
only 4 short years ago when the global financial crisis began. In large
part, the near implosion of the world's economy was caused, in part, by the
creative proliferation of derivative products that were tied to United States
residential mortgages.

Back
to BIS. Here is the chart from their latest Semiannual OTC
Derivatives Statistics to the end of December 2011 in billions of dollars,
remembering that only 13 of the 58 member countries are reporting their
statistics:

All
tallied, BIS reports that there were $647.762 trillion worth of derivative
contracts globally at the end of December 2011. Of all of the
over-the-counter derivatives, interest rate contracts are by far the largest when measured in terms of
dollar value. In interest rate swaps, two parties agree to exchange (or
swap) interest rate cash flows with the ultimate goal of preventing exposure to
fluctuating interest rates or to allow the parties to gain access to a lower
interest rate. Clear as mud, right? At the end of 2011, there
were $504.098 trillion worth of interest rate contracts and, of these, $402.611
trillion were interest rate swaps.

Let's
quickly put these numbers into perspective with this graph from the World Bank:

That's
right. The GDP for the entire world was $63.257 trillion in 2010. That
means that, according to BIS statistics, the world's entire stock of
derivatives was 10 times the size of the world's GDP. What is even worse is that
some experts, including Paul Wilmott, estimate that the notional value of the
world's derivatives markets is closer to $1.2 quadrillion or nearly twice what BIS statistics tell us.

As I
noted above, interest rate swaps are the largest component of the world's
derivative market. When interest rates rise, one of the parties will be
on the right side of the trade and the other will find themselves on the losing
side as is the case with all derivatives. With the size of the interest
rate swap market exceeding the size of the world's GDP by many times, the
fallout could be very, very ugly particularly when one considers how ugly it
got when the much smaller credit default swap market collapsed in 2008 - 2009. There
are always winners and there are always losers on any trade; unfortunately,
this time, we could all find ourselves on the losing side.

Sunday, May 20, 2012

Quebec's
austerity measures which include the raising of tuition fees for its
post-secondary students have been headline news in Canada recently and now Quebec's September election is front page news. In
light of that, I thought that it was time to do a brief posting on Quebec's
financial situation.

Let’s
start by looking at Quebec’s debt.
Quebec is Canada's second-most indebted province after Ontario and has
the misfortune of having a bond credit rating that is in the lower middle of the
pack, well below Alberta, Saskatchewan and British Columbia, Manitoba and below
New Brunswick and Ontario at A+ (Standard and Poor's), the same
rating as Nova Scotia. This poor rating makes it more expensive for
Quebec to service its debt. Quebec's total debt in fiscal 2011 - 2012 is
estimated to be $170.9 billion; this compares to Ontario's
estimated debt of $237.6 billion. Quebec's debt nearly twice the size of
all other provinces combined (excluding Ontario). Here is a graph showing
how Quebec's net debt has risen since 1986 - 1987:

Quebec's
debt-to-GDP is estimated to be 51.2 percent in 2011 - 2012, the highest in
Canada by a very wide margin with Ontario coming in second place at 37.2
percent and Nova Scotia coming in third place at 35.2 percent.

In
the March 2012 budget, the Charest government noted that the deficit for fiscal
2011 - 2012 was lower than predicted in the fall, coming in at $3.3 billion or
1.0 percent of GDP compared to the estimated deficit of $3.8 billion. A
large part of this improvement is due to a decrease in spending on interest
owing on the debt of nearly $300 million, mainly on the back of lower interest
rates. That said, in fiscal 2011 - 2012, Quebec spent $7.452 billion on
debt interest charges which works out to 11. 4 percent of revenues and 12.1
percent of program spending. Projecting forward, even as the debt hits
$183.4 billion in fiscal 2013 -2014, Quebec does not anticipate debt interest
charges in excess of 12.2 percent of revenue. Best of luck!

As an aside, Quebec's
headline austerity measure, the increase in the Quebec Sales Tax from 8.5 percent to 9.5
percent on January 1st, 2012 had an impact on consumer spending in the province
as consumers hastened to make purchases before the tax increase. I can
only imagine how many provincial treasurers are watching this move with great
interest.

Here is a graph showing how and when Quebec plans
to return to budgetary surplus:

Here
is a graph showing how Quebec plans to cut the annual growth rate of spending
increases from an average of 5.7 percent annually from 2006 to 2010 to an
average of only 2.8 percent from 2010 to 2014:

I
find this interesting, particularly since Quebec's population, like that of the
rest of Canada, will be aging and availing themselves of more and more of the
province's health care over the coming years yet, Quebec plans to spend less.

Quebec's
objective is to reduce its very high debt-to-GDP ratio from a peak of 55.3
percent to 45 percent by 2026 as shown here:

My
suspicion is that this too will be a difficult target to meet, particularly if
interest rates on its existing debt rise to historical norms. As well,
should another deep recession become entrenched in the global economy, it will
be very difficult for a future Quebec government to avoid spending additional
funds to stimulate the economy just as they did during the Great Recession. As
well, Quebec has booked $825 million in "new measures" which will
consist of either revenue raising or expenditure restraint that will take place
from 2014 - 2015 onwards. Since these "measures" have not been
identified, they provide a downside risk that the plan to cut debt and deficit
will not be met.

Quebec's
economic growth is projected to be rather modest, particularly when compared to
the rest of Canada as shown here:

This
sub-par growth forecast is due in large part to softness in job creation and an
expected slowdown in the province's housing market. Sales of existing
homes and new home construction levels are both declining and this decline is
expected to continue through 2013. Interestingly enough, TD Economics
projects that Quebec's housing prices will correct in the range of 10 to 15
percent by the end of 2013. When all economic data is tallied, the government
assumes that GDP will grow by 1.5 percent in 2012 and 1.9 percent in 2013, slightly less optimistic than TD's forecast.

While Quebec's move toward fiscal balance are admirable,
there are many unknowns in the equation that may prevent fantasy from becoming
reality. Quebec has traditionally relied rather heavily on transfers from the federal government as shown here:

If
the Harper government follows through with its plans to wean Canada's have-not
provinces from the federal teat, Quebec may find it impossible to meet its
fiscal goals. As well, when interest rates return to normal levels, Quebec's expenditures on debt interest payments will become an ever-increasing portion of its overall spending. Since Quebec is already Canada's most highly taxed regime, if the province hopes to meet its targets, it has only one choice - cut spending now.

Friday, May 18, 2012

The
recent mainstream media coverage of the "Facebook Event of the
Century" has me thinking that one of two things has happened. First,
either it is a very, very slow news cycle or, second, we have entered yet
another stock mania. My suspicion is that this is yet another mania,
created by the "pump and dump" set and very heavy coverage by the media.

By way of comparison, let's
take a look back at one of the original manias, Holland's tulip mania of the
1630s, also known as "tulipomania". Tulips were highly sought
after by the wealthy in parts of Europe. By the 1630s, even the middle
classes strove to own tulips since they were seen to be an important part of
maintaining one's social status. In Holland, since tulips bloom in mid-
to late spring, the buying and selling of tulip bulbs generally occurred during
the summer months so that prospective buyers would have a chance to view the
flower and have an idea of what they were buying since the value of the bulb
varied with the appearance of the flower. Once the bloom had died, the
bulb was removed from the soil. The problem with this system was that the
flower varied from one season to the next.

In
1635, prices for tulip bulbs began to rise and bulbs, rather than being sold
individually, were sold by weight while they were still in the ground. The
weight was measured in aasen, a unit of measurement that is less than 0.0017
ounces. This meant that larger bulbs cost purchasers more than smaller
bulbs and since tulip bulbs become heavier after they are in the ground for a
period of time, the price of a heavier bulb could increase by 300 to 500
percent even if the price by weight remained the same. One advantage to
the larger bulbs was their increased ability to produce smaller offset, the
small bulbs that are attached to the mother bulb. This also made larger
bulbs more valuable.

The
most valuable tulips were those with contrasting, variegated markings. Most
desirable were those that had flames of red or purple against a white or yellow
background. This variegation is created by a mosaic virus that is carried
by aphids. Unfortunately, growers had no idea which bulbs would result in
these markings and, on top of that, infected bulbs were less likely to produce
the smaller offset bulbs since they had been weakened.

In
1635, the price of tulips began to rise. Purchasers bought their bulbs in
the winter, were handed a promissory note and took delivery in the summer, one
of the first futures markets. Buyers promised to pay a specific price for
bulbs in the ground at a specific date in the future, speculating that the
bulbs would be more valuable in the future at which time the promissory note
could be sold to the new buyer in the hope of realizing a quick and risk-free
profit. By the last two months of 1636, speculation was rampant with the
price of the most desirable tulips doubling or tripling. Many speculators
suddenly became rich which enticed other speculators who wanted to get in on
the party. Speculators paid for bulbs using cows, land, shops and houses;
in one town, a farmhouse was exchanged for three tulip bulbs. Buyers and
sellers automatically assumed that the bulbs could be sold at ever-higher
prices. The trade in tulip bulbs was so lucrative that they were even
traded on the Amsterdam Stock Exchange according to some sources while others state that tulip trading was always on the margins of Dutch society.

At
its peak, a single tulip bulb weighing 410 aasen (0.7 ounces) sold for 3000
guilders. This was approximately 20 times the annual salary of a skilled
craftsman and, at the time, would have bought eight pigs, four oxen, twelve
sheep, twenty-four tons of wheat, two tons of butter, a thousand pounds of
cheese and a ship. The record price for a bulb that was to be split into
two was 5200 guilders or 35 times the annual salary of an average Dutch citizen.

The
tulip market crashed (as do all manias) in rather spectacular fashion. At
one auction, the "greater fool" did not show up and, bulbs that had
been priced at 5000 guilders a few weeks earlier, fell to one hundredth of that
amount. In the end, the promissory notes were deemed valueless and only
contracts made after November 1636 were valid; buyers in these contracts would
be freed from the contract upon the payment of 10 percent of the contract's
value. The few who had enriched themselves by selling their bulbs at the
height of the market stood in sharp contrast to many families who were ruined
by their "investment" in tulipomania, many merchants and
noblemen ended up living on the streets as a result of their foolishness.

While
I realize that the Facebook initial public offering is somewhat different that
tulipomania, there are some parallels. People are making the assumption
that Facebook will be the next Microsoft or Google and want to get in on a “good
thing” before it is too late. While that may be the case, Facebook's valuation
is purely speculative at this point and, most importantly, unlike Google and
Microsoft, for now, they are pretty much offering a single product. As we
all know, consumers are a particularly finicky lot with extremely short
attention spans; what is "cool" today, may be "crap"
tomorrow a lesson that does seem very hard for humanity to learn.

On
the upside, a few Facebook insiders just became multi-millionaires. Apparently,
history really does repeat itself.

Canada's
Bank of Montreal recently released the results of another one of their fascinating surveys; this time, they asked Canadians
whether or not they expected to be carrying a mortgage as they "rode
west" into their sunset retirement years. Here are the results.

Across
Canada, an average of 51 percent of Canadians expect to be carrying a mortgage
into their retirement years. Regionally, these numbers vary greatly as
shown here:

Canada
Average: 51%

British
Columbia: 59%

Alberta:
46%

Manitoba/Saskatchewan:
48%

Ontario:
47%

Quebec:
58%

Atlantic
Canada: 43%

I am
not overly surprised by these numbers, particularly for British Columbia where
housing prices on the Lower Mainland are stratospheric and mortgages are
practically lifelong indentured servitude. Ontario's results are a bit off
if one were to consider only the 416 area code, however, many parts of Ontario
outside of the GTA remain relatively affordable. While Atlantic Canadians
have the lowest overall household incomes in Canada, they also benefit from
some of the lowest-priced real estate in Canada, leaving them the least worried
about carrying mortgage debt into retirement.

On
top of the issue of too much mortgage for too long, 52 percent of Canadian
homeowners feel that their debt load or mortgage is hindering their ability to
save for retirement.

Let's
look at some reasons why Canadians are concerned about having debt in their
sunset years. As shown on this graph, Canada's household debt levels (in
red) are higher than the Eurozone, the United States and the United Kingdom:

Here
is a graph showing what has happened to the ratio of debt to personal
disposable income in Canada since 1980:

Notice
that mortgage debt alone is approaching 100 percent of personal disposable
income up from a low of just above 40 percent less than 20 years ago.

Here
is another interesting graph showing the mean debt of Canadians in 2010 by age
group in thousands of dollars and by type of debt:

Canadians
between the ages of 56 and 65, prime retirement years, still have a substantial
debt load consisting of mortgage debt, secured lines of credit and other
consumer credit.

This
graph shows the distribution of household debt by age group as a share of the
total household sector debt:

Note how the blue line lies above the red line? As a
consequence of the aging population, the proportion of total household debt
held by older households has risen over the decade from 1999 (in red) when
compared to 2010 (in blue).

In
this graph, we see how overall household indebtedness has increased for the
same age group (31 to 35 years of age) between 1999 and 2010:

In
1999, a typical household aged 31 to 35 years of age had total mean debt of
$75,000; by 2010, a typical household aged 31 to 35 years of age had a total
mean debt of $120,000, an increase of 37.5 percent.

This
final graph shows the mean mortgage debt held by Canadians based on income and
age group for 2010:

Mortgage
debt rises for households with increased levels of household income as would be
expected, however, I was rather surprised to see that the 50 to 64 and 65 plus
age groups (green and yellow lines) still had mortgage debt even when their household income was in
excess of $125,000 annually, twice the average Canadian household income.

Canadians
concern about their personal debt levels during the last decades of their lives
is, well, concerning. If, as many analysts predict, housing prices drop
or interest rates rise, older Canadian households will find it even more
difficult to retire on a fixed income if, in fact, they have a pension at all. The
baby boomer generation may be facing the perfect personal financial storm for
the following reasons:

1.)
Higher than historically normal household debt levels.

2.)
A rising interest rate environment.

3.)
A housing market that is declining as more of their peers sell into a saturated
market to capitalize on their built-up home equity to fund their sunset years.

4.)
A lack of pension income outside of OAS and CPP, underfunded pensions or
defined contribution pensions that have lost value.

Yes, things really are different this time, particularly if
you compare the retirement prospects of baby boomers to the generation that
preceded it. The 51 percent of
Canadians that will still be heavily indebted in their retirement years will
find their new reality far different retirement reality from that of their
parents.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.